In conventional loan arrangements, as by a bank lending funds to a borrower, an interest rate and schedule of payments are typically agreed upon in advance. The periodicity of payments are typically monthly, although longer or shorter periods may also be agreed upon. Usually, both the interest rate, as applied to the unpaid balance of the loan, and the periodicity are fixed and are generally non-negotiable thereafter.
In such a typical loan arrangement the borrower is required to adhere to the amount of each payment, which includes both principal and interest, and to the payment schedule although the term of the loan may be reduced by advanced payments. If a payment is missed, or even if a payment is late, there is usually a penalty, such as by having the unpaid capital increased by a specific amount, thus increasing the interest portion of each subsequent payment, or an automatic increase in the interest rate. It often happens that, for some reason, such as a temporary incapacity or a temporary financial pinch, the borrower cannot make the payment that is due at a particular time, and then has no recourse other than to submit to the penalties. In extreme cases, the lender may even foreclose on the amount of the unpaid principal, as by taking any security deposit the borrower has made, and further, demanding payment of any loan balance not covered by the security deposit. While such extreme cases are typically modified by existing state law, the fact remains that the loan contract has been breached and the lender, within the bounds of existing law, may demand payment of the unpaid balance.